VACATION OR PTO?

Steven Cesare, Ph.D.

A business owner from the free state of Florida called me the other day to talk about his company’s Vacation Policy. During that discussion, it quickly became obvious that the issues of vacation, Paid Time Off (PTO), and sick leave, as well as programmatic decisions had to be presented in a clear fashion. This post shares several of those features, all the while admonishing each of you to review your respective state laws, many of which have recently undergone a lot of legislative change, especially related to mandated paid sick leave.

First, the Fair Labor Standards Act (FLSA) does not require payment for time not worked, such as vacations, sick leave or federal or other holidays. These benefits are matters of agreement between an employer and an employee (or the employee’s representative). That said, in today’s competitive employee staffing environment, companies are routinely pressured to offer paid vacation or PTO to attract and retain high-caliber talent. In short, almost all companies offer vacation or PTO benefits to some of its workforce.

Let’s clarify some terms. Originally, companies offered paid vacation benefits to employees for rest and relaxation. Likewise, most companies also once offered paid sick leave (i.e., usually three days per year) to address occasional illness. Two separate types of paid leave, based on two very different purposes.

With the passage of time, some employees began to use their sick days as vacation days, instead of for illness. This forced companies to investigate employees’ use of sick leave in questionable circumstances (e.g., off from work on a Monday, requiring a doctor’s note for all sick leave usage), which became very bureaucratic. Eventually, due to administrative practicality, the two buckets (e.g., vacation, sick leave) became consolidated into a single bucket (i.e., Paid Time Off) with fungible time off for any purpose.

While most companies now have a single PTO Policy, some still have separate distinctions for vacation and sick leave. Confusion appears when a company has a PTO Policy and a Sick Leave Policy; while legal, that terminology contradicts the definitional intent to simplify those programs.

In my professional opinion, underscored by the KISS rationale, companies should have a single PTO Policy. But if they want to have separate Vacation and Sick Leave Policies, I’m fine with it. However, companies should not have the semantically incompatible format of offering a PTO Policy and a Sick Leave Policy.

The common dilemma appears when an employee leaves the organization. In several states, employers must pay employees for unused vacation hours at the time of dismissal. Yet, in most states, paid sick leave is not compensable at the time of dismissal. However, based on certain state laws, when vacation time and sick leave time are combined into a unitarian PTO Policy, it is very likely that all unused PTO benefits must be paid to dismissed employees. In this case, the company must determine if the expense of paying PTO benefits to dismissed employees is more costly to the company, than the time-consuming process of tracking two separation paid leaves of absence, for every employee, every payroll period.

As a capitalist, I like to, Keep It Simple Steve.

Didn’t see that one coming, did you?

For the sake of example, most companies can offer five days of paid vacation to their employees. In those states where paid sick leave is the law (i.e., usually three days), most companies will adapt to that requirement by transitioning to a PTO program that offers five paid days, to be used for either vacation or sick leave, all the while remaining legally compliant. Otherwise, they will have to offer five days of vacation time plus the legally-mandated three days of sick leave, totaling eight paid days off from work for all eligible employees. Do the math. I’m serious: Do the math.

The Florida business owner decided to adopt the single PTO model.

In next week’s post, I will present several additional and very prevalent issues about Vacation and PTO that the Florida business owner and I discussed.

Don’t take a day off.

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